FINANCE: 20 Factors to Identify an Employee or Independent Contractor
Column by Stephen Wiggs
We are all aware that our current administration, fueled by the previous one, has spent us into bankruptcy. To collect as much from the American taxpayer as possible, the Internal Revenue Service will step up its audits this year. One area it will target are those small business that hire "contract labor" when they are really employees. Why would a small business do this? They don't have a 941 liability, it's up the worker to pay their own taxes, they don't have to make a contribution to the employee's Social Security and they don't have to purchase workers comp insurance.
To prevent you from have those friendly people from the IRS help you with your taxes, the following information is provide:
There are 20 factors identified by the IRS as indicating whether an individual is an employee or independent contractor, and referred to in Rev. Rul. 87-41, 1987-1 C.B. 296. They are as follows:
- Instructions. An employee must comply with instructions about when, where and how to work. Even if no instructions are given, the control factor is present if the employer has the right to control how the work results are achieved.
- Training. An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods and receive no training from the purchasers of their services.
- Integration. An employee's services are usually integrated into the business operations because the services are important to the success or continuation of the business. This shows that the employee is subject to direction and control.
- Services rendered personally. An employee renders services personally. This shows that the employer is interested in the methods as well as the results.
- Hiring assistants. An employee works for an employer who hires, supervises and pays workers. An independent contractor can hire, supervise and pay assistants under a contract that requires him to provide materials and labor and to be responsible only for the results.
- Continuing relationship. An employee generally has a continuing relationship with an employer. A continuing relationship may exist even if work is performed at recurring although irregular intervals.
- Set hours of work. An employee usually has set hours of work established by an employer. An independent contractor generally can set her own work hours.
- Full-time required. An employee may be required to work or be available full-time. This indicates control by the employer. An independent contractor can work when and for whom he chooses.
- Work done on premises. An employee usually works on the premises of an employer or works on a route or at a location designated by an employer. Observation. Factors 7, 8, and 9 may have become of less importance in view of computers and the Internet that allow workers to perform just as well, and may be even better, away from the workplace.
- Order or sequence set. An employee may be required to perform services in the order or sequence set by an employer. This shows that the employee is subject to direction and control.
- Reports. An employee may be required to submit reports to an employer. This shows that the employer maintains a degree of control.
- Payments. An employee is generally paid by the hour, week or month. An independent contractor is usually paid by the job or on a straight commission.
- Expenses. An employee's business and travel expenses are generally paid by an employer. This shows that the employee is subject to regulation and control.
- Tools and materials. An employee is normally furnished significant tools, materials and other equipment by an employer.
- Investment. An independent contractor has a significant investment in the facilities she uses in performing services for someone else.
- Profit or loss. An independent contractor can make a profit or suffer a loss.
- Works for more than one person or firm. An independent contractor is generally free to provide his services to two or more unrelated persons or firms at the same time.
- Offers services to the general public. An independent contractor makes his services available to the general public.
- Right to fire. An employee can be fired by an employer. An independent contractor cannot be fired so long as he produces a result that meets the specifications of the contract.
- Right to quit. An employee can quit her job at any time without incurring liability. An independent contractor usually agrees to complete a specific job and is responsible for its satisfactory completion or is legally obligated to make good for failure to complete it.